Philip Morris v. Williams and Class Actions

Yesterday, the Supreme Court decided–five to four–to strike down a punitive damage judgment against Philip Morris under the Due Process Clause. (Cato, for the record, filed this brief in the case, written by deterrence theorists Steven Shavell and A. Mitchell Polinsky). For commentary on the case, see here and here. You can watch me talk about the case on CNBC here.

For my money, the most interesting, and potentially far-reaching, implication of the decision is for class actions seeking punitive damages.

On page 5 of the slip opinion, the Court says that “the Due Process Clause” prohibits a State from punishing an individual “without first providing that individual with ‘an opportunity to present every available defense.’”

That quoted language (from a non-punitives decision, Lindsey v. Normet) hasn’t appeared in the Supreme Court’s other punitive damage cases. Its appearance here is significant, because Lindsey’s broad, bright-line language is often invoked by defendants in very large class actions, even those that don’t involve punitive damages. Their argument goes like this: When courts ”certify” (authorize) a very large class action, they violate due process if the very scale of the suit prevents defendants from raising individualized defenses that are otherwise available under the statute. Expect Williams to be cited extensively by class action defendants, particularly in class actions seeking punitive damages.

It’s fairly easy to see why Williams is such a boost for these defendants by looking at the Ninth Circuit’s recent decision in Dukes v. Wal-Mart–which upholds a trial court order certifying 1.5 million gender discrimination claims, seeking $11.5 billion in punitive damages and lost pay.

As the trial court acknowledged, individualized hearings on employees’ claims—the usual practice in later stages of Title VII cases—were impractical in a class action of the mammoth scale envisioned. The trial court therefore allowed liability and remedies to be proven based on statistical evidence and formulas, barring defendants from making individualized showings that particular employees weren’t discriminated against in fact.

Wal-Mart, in turn, argued its due process rights had been violated, because it had been deprived of defenses to which it was entitled. ”In an individual case,” said Wal-Mart, it could present individualized evidence “to establish a complete defense to liability or preclude the entry of a backpay or punitive damage award.” The Rules Enabling Act guarantees the availability of that kind of defense in a class action to the same extent it is available in an individual case. Given the punitive damage request, Wal-Mart argued, due process prohibited the court from depriving Wal-Mart of its entitlement to raise such individualized defenses.

Williams gives Wal-Mart much more ammunition than past punitive cases to argue this point on appeal to the Supreme Court. To be sure, the Court’s aside that “it may be appropriate to consider the reasonableness of a punitive damages award in light of the potential harm the defendant’s conduct could have caused” (emphasis added) throws a possible lifeline to the Dukes plaintiffs. That allows them to argue that a “rough” statistical measure of the harm that “could have been caused” to individual class members is all the proof necessary to anchor punitive damages in large antidiscrimination classes. Indeed, the trial court in Dukes envisions exactly such a probabilistic measure at the remedies stage of the trial: “[O]nly those class members who can make a showing that they were either actually harmed by the discriminatory policy or were at least ‘a potential victim of the proved discrimination’ are eligible to recover [lost pay and, therefore, punitive damages].”

This expansive reading of “potential harm” is, however, inconsistent with the Supreme Court’s careful caveat in BMW v. Gore. There, the Court said that “potential harm” that can anchor a punitive damages award is confined to additional harm to persons who have actually been injured – for example, added harm that was “likely to result” if a defendant’s wrongful scheme hadn’t been prematurely interrupted. That’s quite a bit narrower than the expansive concept of “potential harm” used in Dukes, which embraces guesstimates about whether any injury occurred at all.

As a result, Willliams, read in the context of previous cases, scores trouble for large-scale punitive damage classes.